"First Rand’s Laurie Dippenaar and I were saying how can we make this merger go through," jokes Nallie Bosman, group chief executive of Absa, South Africa’s second biggest bank, referring to Nedcor’s bid for Standard Bank Investment (Stanbic).
Absa and First Rand, the third largest bank, are hoping that if Nedcor’s R30bn ($4.65bn) hostile bid for Stanbic is successful, the two banks will be so busy merging they will lose market share.
South Africa’s first hostile bank bid is the first salvo in what promises to be a busy year in mergers and acquisitions for all the banks. Some reorganisation is a given since one of the legacies of the apartheid era – an inefficient use of capital through cross-shareholdings – continues to be endemic.
Also, banking in South Africa is becoming more competitive. The large foreign banks have, in many cases, taken the biggest corporate clients from the local banks, customers are becoming more price sensitive. Also, loan growth may be difficult, while niche banks such as Investec are stealing profitable bits of their business, like fund management, and Internet banking promises to shake things up.
As The Banker went to press, a court was due to rule on whether the competition authorities have jurisdiction over the Nedcor bid. Stanbic is certain if they do they will rule out the merger because the combined banks would have too large a share of parts of South Africa’s retail market – anything from 35 per cent to 50 per cent. If they do not, the chances of the bid succeeding improve, but the court’s decision will not mark the end of the battle (see page 82).
One of Nedcor’s main strengths is a cost/income ratio of 51.7 per cent, the lowest among the big South African banks. But organic growth is not enough to leverage its capital investment in technology.
"Nedcor has fantastic systems but it does not have the through-put," says Michael Gresty, an analyst at Barnard Jacobs Mellet Securities in Johnannesburg.
Although Nedcor insists its first approach to Stanbic last September was friendly, the current climate is undoubtedly hostile. When branch staff wear T-shirts saying: "F-off the greens!" (in reference to Nedcor’s corporate colours), and: "Hands off our bank!", that antagonism becomes a major element in the equation.
"The biggest factor that inhibits this deal is the hostility," says Justin Kretzschmar, an analyst at SG Securities.
Nedcor itself admits shareholders’ main worry is the effect of a hostile bid on Stanbic’s business if key staff leave. Tony Routledge, executive director for strategic and corporate activities at Nedcor, told The Banker the key people in the organisation had already been identified and would be offered significant benefits to stay.
But this is discounting the level of animosity to Nedcor, and the loyalty to Jacko Maree, Stanbic’s group chief executive. "If Nedcor gets it, what will it get?" asks Mr Gresty. "It will take it a lot longer to integrate than it thinks. Its integration of People’s Bank was not great. Eventually it will turn Stanbic around but there will be pain for a number of years."
Nedcor and Stanbic have strategies that are light years apart. Nedcor aims to be a global digital bank using its alliance with Dimension Data and Capital One, with low-cost branches, including ATM-only ones, and moving into markets such as India and Australia. Stanbic, on the other hand, has a retail bank that is one-third of its total business, but it is present in a number of other fields. It has the largest merchant bank in South Africa, a bancassurance business, banking operations in other African countries and an emerging markets operation in London.
Nedcor says if it wins it will probably sell Liberty Life, the life assurance and financial services group owned by Stanbic. It will also review the London operations that appear to be "very high risk", and it will probably keep the African operations.
The bid has – as they generally do – given a wake-up call to Stanbic’s management. As a result, its net profit for 1999 rose 51 per cent to R3.09bn, reinforcing its argument that Nedcor should pay more than it is offering. Stanbic says it would consider an exchange of 4.75 Stanbic shares for 1 Nedcor share, plus a cash component, instead of the 5.5 Nedcor is offering, or the 5.25-for-1 ratio Nedcor promises it will offer if the Stanbic board recommends the offer. Nedcor, meanwhile, also reported strong results with a 27 per cent rise in net profit for 1999 to R2.41bn.
"It [Nedcor] cannot afford not to do this deal," says Jacques Badenhorst, an analyst at ABN Amro Securities in Johannesburg.
Admittedly, Nedcor’s boast that it can achieve a 30 per cent return on equity for the merged entity – compared with its current ROE of 21 per cent – seems extremely ambitious. Stanbic’s Mr Maree also believes Old Mutual, the life insurance and financial services firm, has a clear conflict of interest problem because it has a 54 per cent shareholding in Nedcor and a 24 per cent shareholding in Stanbic and has given an irrevocable undertaking to support Nedcor’s bid.
One thing is clear – if Nedcor does not succeed with Stanbic, other banks should watch out. "Yes we need another bank," admits Mr Routledge. "First National Bank was our first choice but it merged with Rand Merchant Bank. Stanbic was our second, and Absa is our third."
Absa has 25.5 per cent of South Africa’s retail client base which might raise even larger competition issues than Nedcor’s merger with Stanbic. However, large slices of Absa may be up for grabs as long-suffering shareholders like Sanlam, an insurance company, sell their holdings. Another possibility is a change in the top management, since the main shareholders have reportedly told fund managers they are fed up with bad performance. One fund manager said the bank is "a shambles and it needs to be taken out of its misery".
Absa’s first-half headline earnings to September 30 rose only 1.9 per cent to R907m. "The bank has an amazing ability to disappoint," says Mr. Gresty. Absa has the highest cost-to-income ratio of all the big banks at 63 per cent, which would allow scope for Nedcor’s cost-cutting abilities. There is also little client overlap between the two banks, as Absa deals with the lower end of the market, Nedcor with the upper end.
Another possible candidate for Nedcor might be its original choice, First National Bank, which merged with Rand Merchant Bank to form First Rand. Analysts speculate that either First Rand could sell First National to Nedcor, or instead there might be a full-fledged merger where Rand Merchant would manage the insurance side – its Momentum insurer business – and be in charge of cross-selling. One rumour is that a top executive at First National told his counterpart at Rand Merchant: "You are just fattening us up for sale."
However, First Rand’s Mr Dippenaar says his staff have had enough of mergers: "All in all, we have had to do a lot of merging [with RMB and FNB] and we cannot do this to our people now." Part of his strategy is to increase the sale of insurance products – although he insists he would not be interested in buying Liberty Life – and offshore investments.
Yet another possibility that has been mooted for Nedcor is the acquisition of Boland Bank, a retail bank owned by BOE,which recently announced a limited reorganisation.
Meanwhile, Investec, South Africa’s fifth-largest bank, does not rule out a domestic acquisition, although it seems unlikely considering its current goals.
"In the first half, 56 per cent of our earnings were from abroad. In 2002 we are looking to increase this to more than 60 per cent," says chief executive Stephen Kosseff. "But it depends on opportunities from the shake-out in banking here."
There will also be an active mergers and acquisitions markets in South Africa’s second-tier financial institutions, as some have suffered liquidity problems, while others are not finding it that easy to make decent profits.
South African banks are also facing challenges from Internet banking and non-financial institutions. Bankers acknowledge the threat from the former and dismiss the threat from the latter. They fear new entrant, virtual banks with cost-income ratios of 20 per cent.
All the large banks have different degrees of Internet capabilities. Many, including Nedcor, First Rand and Absa, are still considering whether to set up a separate Internet bank. The Internet will only transform banking in South Africa, though, when WAP (Wireless Application Protocol) technology becomes widespread.
"The vast majority of people who do not have banking facilities do have cell phones,"í says Mr Routledge. Nedcor is working with Nokia to develop WAP.
As for non-bank competition, retailer Pick ’n Pay "tried and failed, ending up with rubbish accounts", says Mr Kosseff. However true this is, South Africa’s banks appear too complacent. An alliance between a foreign Internet bank and a retailer such as Pepkor, which has more than 1,300 stores in the country, could become a threat.